Nouriel Roubini, an economist known for predicting the financial crisis, says a "perfect storm" may be brewing, but not for Treasuries
Dr. Doom is at it again. Nouriel Roubini, an economist best-known for predicting the financial crisis, says a "perfect storm" may be brewing for the global economy. While it's hard to call that good news for the U.S., Roubini says the nation could benefit in this pessimistic scenario: it will continue to serve as the safe-haven for investors. That's particularly good news for U.S. debt, which is facing a tough road over the next few months as Congress seeks deficit reduction and debates raising the debt ceiling.
The "Perfect Storm"
Roubini sees at least three significant problems looming outside of the U.S., according to a Bloomberg report on his recent comments during an interview in Singapore. First, China's economy might slow down. He says there's a "meaningful probability" of a hard economic landing there. Second, Europe's debt restructuring could stunt growth in the region. Finally, He worries about stagnation in Japan. If all of these problems occur simultaneously, then the global economy is in for a pretty rough ride.
But Clear Skies for Treasuries?
The U.S. is not insulated from problems in other nations. Exports, for example, will be directly affected if the global economy slows. But there's at least one way in which the U.S. would benefit: investors would flee to the safest assets out there, which would continue to be U.S. Treasuries. Kevin Lim at Reuters also reported on the Roubini interview, saying:
"Every time there is a global bout of risk aversion, and every other week there is another tail risk or black swan event, people dump the euro, dump yen and go to the safety of the U.S. dollar and U.S. treasuries," he added.
For that reason, Roubini doesn't see a bubble in Treasuries at this time. Indeed, if the global economy does run into trouble, then Treasury prices may rise even further. As the U.S. works on its own austerity, the expansion of Treasury supply might begin to slow. Fewer Treasuries offered plus rising demand would mean even lower interest rates and higher prices.
Presently, this is an important point. Washington's debate over the debt ceiling has turned into a long-term deficit reduction negotiation. That has caused some investors to worry about Treasuries. But if the economy outside of the U.S. begins to crumble, then those investors will have no where else to go. To be sure, they will face the reality that, even if the political climate in the U.S. is ugly, there's little real chance that the nation will miss an interest payment on its debt.
Other Benefits for the U.S.?
What Roubini doesn't get into, however, is that there might benefits for the U.S. beyond Treasuries if the global economy slows down. Really, exports are a relatively small part of the U.S. economy, making up about 13% of GDP. While a decline in exports would hurt, other aspects of the U.S. economy improving could more than make up for trade slowing.
For example, that same global demand contraction that may cut U.S. exports would drive down the prices of many commodities, like oil. Rising food and gasoline prices are arguably the chief obstacle for the U.S. economy at this time. Consumers and businesses have both cut their spending in response. If those prices begin to decline, then the U.S. recovery could get back on track.
Moreover, more aggressive investment in the U.S. could extend beyond just Treasuries. U.S. corporations could benefit if investors looking for a higher return than Treasuries provide turn away from equities in developing nations for a time and move to U.S. stocks. Of course, U.S. corporate debt will also look more attractive than bonds from firms in other nations with worse economic situations.
Taking the edge off U.S. deficit concerns could make a huge difference. Beyond the direct benefit to Treasuries, it might also help convince Washington that a little bit of additional action can be taken to curb unemployment, which could also make sense in a short-term context. Ensuring that interest rates remain low would also allow the U.S. economy to serve as a better environment for expansion as firms gain optimism.
The U.S. should not hope for a global economic slowdown. The country would likely be better off if all nations rise together. But if China, Europe, Japan, and others do struggle, the contagion might not spread to the U.S. Indeed, there are several reasons to believe that the nation could ultimately benefit.
Image Credit: REUTERS/Marko Djurica